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The little-known loophole that boosts teachers’ pensions by thousands of pounds

Teachers' Pensions
The median salary for teachers is already up to £41,604 in England and £42,869 in Wales - E+/JohnnyGreig

Almost half a million teachers in England and Wales could get tens of thousands of pounds more in their pension if they use a little-known loophole, analysis suggests.

Teachers in the profession before 2012, which records show was over 440,000, could be unaware that they could boost their retirement income by opting out of their pension for just 30 days.

These teachers are part of the final salary scheme, but even though it’s now closed, they’re still entitled to have the latest years in their career considered when their pension income is calculated – often when their salaries are highest.

But not every teacher earns more at the end of their career, and those who don’t could really hurt their pension unless they get those early years considered as well.

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This is where the loophole comes in, and with the teacher median salary already up to £41,604 in England and £42,869 in Wales, and many earning much more, not using it could cost a huge amount in retirement.

Teacher pensions have changed

Teachers in the pension scheme before 2007 retired at 60 with a proportion of their “average salary” as an annual income for life. This was either their final wage, or an average of the highest consecutive three from the previous 10 – whichever was more.

They accrued one 80th of this for every year they made pension contributions, plus a tax-free lump sum of three times that amount.

In 2007, the retirement age increased to 65. The lump sum was removed, but teachers now accrued one 60th – meaning more per year.

Both schemes stopped in 2015, but pre-2012 members could accrue more 80ths or 60ths until 2022. Whichever pension teachers have, it increases annually with inflation.

The loophole that could net teachers thousands

Normally, any salaries from over 10 years ago aren’t considered for a teacher’s final pension calculation.

However, anyone who doesn’t leave the profession for more than five years can easily get around this. All they have to do is opt out of their pension for one month, then opt back in.

This freezes the entire previous decade, allowing those years to now be taken into consideration whenever they retire.

Teachers can keep freezing 10-year periods by repeatedly opting out. It’s called the hypothetical calculation.

The retiree will automatically get the highest amount from their last salary or any three consecutive years from all those available periods. Earlier salaries will be used if they’re higher, and given they all have inflation added every single year up to retirement, they often are.

Dave Fountain, himself a former teacher, came across the loophole by “talking to older and wiser heads who’d been through it.”

He said: “I found it late because I wasn’t looking. I lost about £6,000 from my lump sum and £2,000 a year from my pension, more now with inflation. You think ‘if I keep paying in, it must get better’. But you can end up paying less, by taking a month out, and you can get more. It’s about looking at the rules and seeing what they do.”

He’s since dedicated hours of his time to setting up a website and helping other people unlock more for their pension.

“One lady was in a position where her pension was going down. She said she needed to get to £15,000 a year then she could leave,” Mr Fountain said.

During the conversation, she broke down in tears because she couldn’t get out of teaching until she hit her milestone. He asked her to send a pension statement, which provides an estimate of a teacher’s pension income.

“She had one of these breaks, but it wasn’t included in the statement. I went through the figures and her pension was £16,000, 20pc higher than the statement and over her target.

“I said ‘don’t take my word for it, get confirmation’. She did, and handed in her resignation.

“People are making decisions based on data that isn’t correct.”

Dave has heard countless more examples, with significant sums involved.

If someone started in 1982 at 20, worked 30 years, became a head teacher in London and topped the payscale, by 2012 their salary could have hit £108,069.

If they then stepped down and moved to the countryside to work their last 10 years as a classroom teacher in a more relaxed, small school, their annual pension could drop as low as £20,850, with a lump sum of £62,550, due to their new lower salary.

If they’d simply opted out for a month in 2012, it could be boosted to £47,884 and a £143,652 lump sum.

Better still, if they’d opted out for a month in 2019, just as the highest paying years of 2009-12 were about to be removed from consideration, inflation is added and it becomes £59,057, with £177,170 as a lump sum.

As with all pensions, it all depends on your circumstances. Asked what his one message to all teachers would be, Mr Fountain said: “Do your research. Look at how the scheme works, work out where your best salaries are and see if you need to take action to protect them.”

Justin Corliss, of investment firm Royal London, said: “Members of the teachers’ pension scheme should be aware of ‘hypothetical calculations’, designed to preserve final salary pension benefits if their pensionable salary reduces later in their career.

“The scheme should carry these out automatically where applicable, but it’s advisable to check with the scheme if they’re in any doubt.”

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